Selling an inherited home in the USA: basis, gain and tax forms

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The sale of a home that arrived through an inheritance raises a question that an ordinary sale does not: gain measured from what? The person who bought the house may have paid a fraction of its present value decades ago. The heir paid nothing. Federal income tax in the United States answers with a rule of its own, and the figure that rule produces decides whether the sale shows a gain, a loss or nothing much at all.

This guide follows the federal rules as the Internal Revenue Service (IRS) publishes them: how the starting figure, called the basis, is set for inherited property; why the sale is treated as long-term whatever the calendar says; how the gain or loss is worked out and where it goes on the return; what Form 1099-S reports at closing; and what the executor or administrator of the estate contributes. It deals with federal income tax only. State income tax and state inheritance tax follow each state's own law and are outside its scope, as is the separate exclusion of gain on the sale of a main home.

IRS Instructions for Form 8949 (2025), IRS Topic no. 409 (figures for 2025 returns) and IRS Instructions for Form 1099-S.

Why an inherited home starts with a new basis

Basis is the figure from which gain or loss is measured. For most property it is cost: the Instructions for Form 8949 for tax year 2025 describe basis as usually the cost of the property. The same instructions add that inherited property may call for a different basis, and that a taxpayer who does not use actual cost attaches an explanation.

The different basis is set out in IRS Publication 551, Basis of Assets, in its December 2025 revision. Under its general rule, the basis of property inherited from a decedent is the fair market value of the property at the date of the person's death. What the decedent paid, and when, drops out of the calculation. The heir's own outlay, which is nil, drops out too.

The IRS puts the consequence plainly in its question-and-answer page on gifts and inheritances, last updated on 29 September 2026. The sale of inherited property is not tax-free as such: the gross proceeds are included in gross income when a person works out whether a return must be filed, and a person who must file reports the sale. But whether tax is due turns on the basis. The page says a sale for more than the basis produces a taxable gain. A home sold soon after a death, for a price close to its value on that day, therefore tends to show a small figure in either direction, and the rise in value during the previous owner's lifetime is not part of the heir's gain.

The four values the IRS accepts

Fair market value at death is the general rule, not the only one. Publication 551 lists four possible starting figures, and three of them depend on choices made for the estate rather than by the heir.

For a house or an apartment, the first two rows are the ones that matter. The alternate valuation date is an estate tax election: the IRS page on gifts and inheritances says the basis is the value on that date only when the executor elects it on Form 706, the federal estate tax return. An heir cannot pick it: the election is made for the estate, on its estate tax return. The rules that fix the date itself sit in the Form 706 instructions, to which Publication 551 refers the reader.

Special-use valuation concerns farms and business premises. Publication 551 says the executor or personal representative can elect it, and that the value elected becomes the heirs' basis.

Where the estate filed no federal estate tax return and the heir received no Schedule A, Publication 551 gives a practical fallback: the basis can be determined from the value at which the property was appraised at the date of death for state inheritance or transmission taxes. The IRS page on gifts and inheritances adds that the executor can supply the date-of-death value.

When the estate tax return fixes the figure

Some heirs do not choose their starting figure at all. Publication 551 explains that when an estate is required to file Form 706, the beneficiaries generally receive from the executor a Schedule A of Form 8971, the statement that reports the estate tax value of the property each of them received. Certain beneficiaries must use that value as their initial basis.

The requirement comes from section 1014(f) of the Internal Revenue Code, which, in the publication's words, makes the basis of certain property acquired from a decedent consistent with its estate tax value. The IRS page on gifts and inheritances traces it to a law passed in 2015. Publication 551 notes that the final regulations were published as Treasury Decision 9991 in Internal Revenue Bulletin 2024-40, and points to section 1.1014-10 of the regulations for the detail.

The Instructions for Form 8949 for 2025 show how the rule reaches the heir's own return. If Part II, column (f) of the Schedule A indicates that the property increased the estate tax, the basis must be consistent with the final estate tax value shown in column (h). The heir starts from an initial basis no higher than that amount and then makes the usual adjustments. Starting higher has a price: the instructions say it can bring a penalty of 20 per cent of any underpayment of tax that results. The gifts and inheritances page describes the same sanction as an accuracy-related penalty.

Spouses, co-owners and community property

Where a home had two owners and one of them has died, the survivor holds a property part of which was inherited and part of which was already theirs. Publication 551 treats three situations differently.

Community property. The publication lists nine community property states: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin. When one spouse dies, the total value of the community property generally becomes the basis of the entire property, including the half that belonged to the survivor all along. The condition is that at least half the value of the community property interest is includible in the decedent's gross estate. The publication's own example uses community property with a basis of US$80,000 and a fair market value of US$100,000 at the death: the surviving spouse's half takes a basis of US$50,000, and so does the half that passes to the heirs.

A qualified joint interest between spouses. Outside community property, a married couple may hold the home as tenants by the entirety, or as joint tenants with right of survivorship where the two spouses are the only joint tenants. Publication 551 calls both a qualified joint interest. One half of its value is included in the estate of the first spouse to die, however much each contributed to the purchase and whichever dies first. The survivor's basis is the cost of their own half, less any depreciation they were allowed, plus the basis of the half inherited. Only the inherited half moves to the value at death.

Other surviving tenants. For other co-owners, the publication works from the share of the value that was includible in the decedent's estate. In its example, a property bought for US$30,000 was worth US$60,000 at the death of the owner who had paid two thirds of the price, and US$12,000 of depreciation had been allowed. The survivor's basis is his own US$10,000 of cost, plus the US$40,000 includible in the estate, less half the depreciation, US$6,000: a total of US$44,000.

The gap between the first two situations is wide enough to be worth drawing. The chart below is a worked example, not market data. It assumes a home bought by a married couple for US$200,000, never depreciated, and worth US$500,000 when the first spouse dies. As community property meeting the condition above, the survivor's basis is the whole US$500,000. As a qualified joint interest, it is the survivor's own half of the cost, US$100,000, plus half the value at death, US$250,000, which makes US$350,000. The third bar shows the exception described just after the chart.

The exception concerns appreciated property handed to someone shortly before they die. Publication 551 says the general rule does not apply if the heir, or the heir's spouse, originally gave the property to the decedent within one year before the death. The heir's basis is then the decedent's adjusted basis immediately before death, not the fair market value. Appreciated property, for this purpose, is property whose fair market value on the day it was given was higher than its adjusted basis. In the worked example, a home given to a relative with an adjusted basis of US$200,000 and inherited back within the year keeps that US$200,000 figure.

Why the sale is long-term from day one

Capital gains are sorted by how long the asset was held. IRS Topic no. 409, last updated on 24 September 2026, gives the general test: an asset held for more than one year produces a long-term gain or loss, and one held for a year or less a short-term one. The Instructions for Form 8949 explain the count, which starts on the day after the property was received and includes the day it was disposed of.

Inherited property is an exception that Topic no. 409 names. The Instructions for Form 8949 for 2025 state it in full: a disposal of inherited property is generally reported as long-term, regardless of how long the taxpayer actually held it. An heir who sells six weeks after the death is in the same position as one who waits six years.

The difference matters because the two kinds of gain are taxed differently. According to Topic no. 409, a net short-term capital gain is taxed as ordinary income at the graduated rates, while a net long-term gain falls under the capital gains rates. The topic sets them out for taxable years beginning in 2025 as follows.

Working out the gain or loss

Topic no. 409 defines the result in one line: the gain or loss is the difference between the adjusted basis of the asset and the amount realised from its sale. IRS Publication 544, Sales and Other Dispositions of Assets, in its edition for 2025 returns, defines both terms.

The amount realised is all the money received, plus the fair market value of any property or services received, plus any liabilities of the seller that the buyer takes over. The publication's example subtracts selling expenses to reach the net figure.

The adjusted basis is the original cost or other basis, increased by certain additions and reduced by certain deductions. For an heir, the "other basis" is the inherited figure described above. Publication 544 gives improvements with a useful life of more than one year as an increase, and depreciation and casualty losses as decreases.

A worked example, with assumed figures. A sole heir inherits a home whose fair market value at the date of death is US$400,000. No estate tax return is required and no alternate date applies. The heir does not live in the home, makes no improvements and sells it five months later for US$430,000, paying US$25,000 in selling expenses. The gain is US$430,000 less US$400,000 less US$25,000, which is US$5,000. It is long-term although the home was held for five months.

The heir's gain is measured from the value on the day of death, not from the price the family paid long before.

When a loss counts and when it does not

The same subtraction can give a negative figure, for instance when the home sells for less than its value at death, or for about that value before selling expenses. Whether the loss can be used is a separate question from whether it exists.

The use the heir made of the home is therefore central. An heir who moved in and lived in the house as a home held it for personal use, and under the passages quoted above a loss on its sale is not deductible. Publication 544 also deals with a home that was later let: a loss may be deducted on property acquired as a home and changed to business or rental use before the sale, but the deductible amount is limited when the adjusted basis at the time of the change was higher than the fair market value. In the publication's example, with an adjusted basis of US$75,000 and a fair market value of US$70,000 at the change, a loss of US$7,380 is cut to a deductible US$2,380.

The case in between, an inherited home that neither the estate nor the heirs ever lived in and that was simply put on the market, is not settled by the passages quoted above. IRS Publication 559 has a passage of its own headed "Sale of decedent's residence", and that is the text to read before a loss on such a sale is entered as deductible.

Where a capital loss is deductible, Topic no. 409 sets the yearly limit for 2025 returns. If capital losses exceed capital gains, the amount that may be deducted against other income is the lesser of US$3,000, or US$1,500 for a married person filing separately, and the net loss shown on line 16 of Schedule D. The excess is carried forward to later years, using the Capital Loss Carryover Worksheet in Publication 550 or in the Schedule D instructions. As a worked example, a taxpayer with a deductible net capital loss of US$10,000 and no other gains would deduct US$3,000 in the year of the sale and carry US$7,000 forward.

Form 1099-S at the closing table

The sale of real estate is reported to the IRS by a third party, on Form 1099-S. The current Instructions for Form 1099-S, on a page the IRS last updated on 30 April 2026, set out who files it. The duty falls on the person responsible for closing the transaction; where a Closing Disclosure names a settlement agent, that agent is the responsible person. If nobody is responsible for closing, the duty passes, in order, to the mortgage lender, the transferor's broker, the transferee's broker and finally the transferee. The parties may instead designate the filer in a written agreement.

For an inherited home, the instructions draw a line between two events. The passing of the property to the heir is not reportable: transfers that are not sales, including a bequest or a gift, are excluded. The later sale by the heir, or by the estate, is a sale of an ownership interest in land and its buildings like any other. Among the listed exceptions is a transfer for total consideration of less than US$600. A further exception covers a principal residence sold for US$250,000 or less, or US$500,000 or less for a married seller, where the seller gives a signed certification that the whole gain is excludable under section 121 of the Internal Revenue Code; that exclusion has conditions of its own.

Several features of the form explain what the heir later sees on it:

• Gross, not net. The gross proceeds box is not reduced by the seller's expenses. Commission and closing costs are dealt with on the seller's own return.
• One form per seller. A separate form is filed for each transferor. Where siblings inherit together, the filer asks at or before closing how the gross proceeds are to be allocated; the answer need not be in writing. If no allocation is given, or the answers conflict, each form reports the total, unallocated gross proceeds.
• Tax number. The filer must ask for the transferor's taxpayer identification number no later than closing, on Form W-9 for a US person.
• Other boxes. The form also carries the date of closing, the address or legal description and the buyer's part of any real estate tax the seller paid in advance. From tax year 2026 the gross proceeds are split between cash and digital assets, with a total.

Reporting on Form 8949 and Schedule D

According to Topic no. 409, most capital transactions are reported on Form 8949, Sales and Other Dispositions of Capital Assets, and then summarised on Schedule D of Form 1040. The Instructions for Form 8949 describe one of the form's purposes as reconciling the taxpayer's figures with those on Forms 1099-B, 1099-DA and 1099-S, which is why the proceeds entered begin with the amount the form shows.

The adjustment columns do the work that the gross figure on Form 1099-S leaves undone. Where selling expenses are not reflected on the form received, the 2025 instructions tell the taxpayer to enter code "E" in column (f) and the expenses as a negative amount in column (g). A nondeductible loss takes code "L", with the loss entered as a positive amount so that it is cancelled. An explanation is attached when column (e) holds something other than actual cost, as it does for an inherited basis.

Taking the worked example from the section on gain: column (d) would show US$430,000, column (e) US$400,000, column (f) code "E", column (g) a negative US$25,000, and column (h) a gain of US$5,000.

Co-heirs each report their own share. As a second worked example, three siblings inherit a home in equal shares; its value at death is US$540,000, it sells for US$600,000 and the selling expenses are US$36,000. With an equal allocation, each sibling's form shows gross proceeds of US$200,000. Each has a basis of US$180,000 and US$12,000 of expenses, so each reports a gain of US$8,000. At the 15 per cent rate that would be US$1,200 of federal tax; for a single sibling whose taxable income for 2025 stays at or below US$48,350, the rate in Topic no. 409 is 0 per cent. The instructions say Form 8949 is completed before lines 1b, 2, 3, 8b, 9 and 10 of Schedule D. Topic no. 409 adds that a taxable capital gain may require estimated tax payments during the year, a subject covered in Publication 505.

What the personal representative does

IRS Publication 559, Survivors, Executors, and Administrators, in its edition for 2025 returns, uses "personal representative" for the person who manages a decedent's property: an executor, named in the will, or an administrator, appointed by a court. The duties it lists are to collect the assets, pay the creditors and distribute what remains to the heirs or beneficiaries, and, on the tax side, to apply for an employer identification number for the estate, file all the returns when due and pay the tax owed up to the date of discharge.

Several of those tasks bear directly on the sale of the home:

1. Identification. The estate's number can be obtained online at once, or with Form SS-4, which takes about four weeks by post. Form 56, which notifies the IRS of the representative's role, is filed as soon as the number is available and stays in effect until another Form 56 ends it.
2. Valuation. The personal representative is the source of the date-of-death value, makes any election of the alternate valuation date or of special-use value, and, where Form 706 is required, sends each beneficiary the Schedule A of Form 8971.
3. The decedent's last return. The final Form 1040 is due when the decedent's return would have been due: for a calendar-year taxpayer who died in 2025, generally 15 April 2026. Publication 559 says the decedent's own capital losses and carryovers can be deducted only on that final return, not on the estate's.
4. The estate's return. When the estate, not the heir, is the seller, the sale belongs to the estate's income tax affairs; Publication 559 has sections on the holding period, the basis of property, and Schedule D of Form 1041 with Form 8949. Beneficiaries generally treat estate items on their own returns consistently with the estate's return.

The role carries exposure and pay, and the tax rules above meet in it: which of them applies to a given sale depends on how the home was owned, how the estate was administered and how the heir used the property. Publication 559 says the executor of an insolvent estate may be personally liable for the decedent's or the estate's tax if they had notice of it or failed to exercise due care. Two forms narrow that risk: Form 4810 asks for a prompt assessment, which shortens the period the IRS has to assess tax to 18 months, and Form 5495 asks for discharge from personal liability, with the IRS given nine months to notify the executor of tax due. Fees received for acting are gross income, reported on Schedule 1 of Form 1040 by a person not in the business of being an executor and on Schedule C by one who is.

Kooky, from Shaka

Kooky edits Agents Estate and builds Shaka, the payment router he made for real estate professionals. One payment comes in, and every agent, agency and party in the deal receives their signed share on closing date.

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